From January 2012, the Government is proposing to introduce new income thresholds or 'tiers' at which different rebate amounts would apply—effectively introducing a means test on the rebate. Older Australians who have received higher rebates, of either 35 or 40 per cent, will also see their rebate affected if their income falls into these new income tiers.

At the same time, the Government proposes changes to the Medicare Levy Surcharge (which is a one per cent levy on higher income earners who opt not to purchase private health insurance). This would require those on higher incomes without insurance to pay even higher levies. The table below shows the proposed income tiers, rebate amounts and surcharges.

Unchanged

Tier 1 $

Tier 2 $

Tier 3 $

Singles

80,000 or less

80,001-93,000

93,001-124,000

124,001 or more

Families

160,000 or less

160,001-186,000

186,001-248,000

248,001 or more

Rebate on private health insurance premiums (%)

Under 65

30

20

10

0

65-69

35

25

15

0

Over 70

40

30

20

0

Medicare Levy Surcharge (%)

All ages

0.0

1.0

1.25

1.5

The Government has argued that the measures will make the private health insurance rebate fairer and fiscally sustainable.The cost of the private health insurance rebate has been growing steadily since it was introduced by the Howard Government in 1999 to address a decline in private health insurance membership and relieve pressure on public hospitals. In 2010–11, the cost of the rebate reached $4.7 billion. The Minister for Health and Ageing in her second reading speech, estimates a saving of $2.8 billion over four years, if the measure is implemented. The original savings estimate was $1.9 billion over the same period.

Those opposing the changes have consistently claimed that they will cause a number of people to drop or downgrade their health insurance cover. They have also argued that the changes will increase premiums, and add further pressure on the public hospital system, as explained in this earlier Flagpost. This report prepared for the health insurance industry by Deloitte's provides more detail.

To counter these claims, on the eve of introducing the rebate legislation, the government released this other report prepared by KPMG. It assesses the impact on public and private hospital utilisation following the introduction in 2008 of indexation on the income thresholds above which the Medicare Levy Surcharge (MLS) applies.

When indexation of the MLS income thresholds was proposed in 2008, the Opposition and many in the industry claimed that it would cause thousands to downgrade or drop their private cover and put pressure on public hospitals. The KPMG report shows that private hospital activity following the changes to the MLS actually grew at a faster rate than public hospital activity, which also grew. The Government argues that this shows patients did not abandon their private cover, as many claimed they would, and that it vindicates the Government's assertion few people will abandon their cover if the current proposal is implemented.

The current debate on means testing the rebate continues to focus on the proportion of people who might drop their cover as the result of this measure and the wider impacts this would have. The peak body representing insurers, the Australian Health Insurance Association, claims that 1.6 million members would drop their cover (or around 16 per cent of current members), the Government points to Treasury modelling showing that just 25 000 (or 0.3 per cent) would do so. But as another Flagpost recently noted, data from the Private Health Insurance Administration Council (p. 2) shows that a small proportion of people drop their cover anyway—1.7 per cent did so in the March 2011 quarter. This figure varies across quarters, and there is some uncertainty over whether these figures represent permanent dropouts, or people who temporarily forego purchasing new health insurance, for whatever reason (travel, loss of income, etc).

The important point to note is that health insurance membership has continued to grow. This means that the number of new or returning members must be exceeding the numbers who drop their insurance permanently. Provided new or returning entrants continue to purchase cover, it would appear that numbers of people can drop their cover without significantly reducing private health insurance membership. Problems would be likely to emerge if this trend was reversed; that is, if the rate of permanent dropouts regularly exceeded the rate of new entrants.

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